Tesco shares had a good outing yesterday after the UK’s Competition and Markets Authority cleared the way for its £3.7 billion takeover of wholesaler Booker. There was plenty of optimism in the market for Tesco shares, as the stock rose from an opening price of 180.5 to close above 188. It was a rise of 6.25%, leadng the FTSE pack, but some of that optimism may be mis-place, and Tesco shares are still off their 52 week high of 205.90.
First, the CMA has only provided Tesco with a provisional green light and there will be plenty of lobbying against the deal from a variety of sources over the next month. However, beyond this there are some major Tesco shareholders who are not happy with the acquisition. Tesco has yet to take the temperature of its shareholders, and frankly, City analysts are not sure if they will wave this through.
Tesco shares: is Booker a distraction?
Many investors are worried that the Booker buy out is too ambitious for Tesco and that the supermarket is trying to do too much at a time when the ground on which it stands is becoming less stable. Changing shopping habits and, frankly, a tougher consumer environment which we expect to become particularly harsh in 2018 mean that Tesco leadership should be focusing on doing what it does, better, than empire building.
Neil Wilson, Senior Market Analyst at ETX Capital, points to the fact that Tesco shares are still down since the deal was originally announced back in January. The 24% premium paid for Booker also undoubtedly scrubs a lot of the value off the deal.
“The big risk seen by investors is that Tesco takes its eyes off the turnaround strategy,” observes Wilson. “Management has said that the merger will generate a return greater than the cost of capital within two years of completion…Tesco shareholders Schroders and Artisan Partners said it was too expensive and too risky.”
Investors thinking of taking the plunge with Tesco shares right now should also note the big leg lowers in April and June. Analysts worry that senior management at Tesco will remain too focused on this deal and not pay attention to the need to grow market share and improve margins.
The Armchair Trader says:
So you want to be a Tesco shareholder? Be a little sceptical of this deal. Both Booker and Tesco operate in mature markets, and this looks like an acquisition that is designed to create growth where little actually exists. The vast majority of M&A deals fail to deliver on targeted revenue or cost benefits. Tesco has been here before, for example with its purchase of Giraffe. Supermarkets in the UK are a tough place to be right now – the retail environment looks shaky in our view, and Tesco needs to come up with an answer to the discount players who will continue to erode market share.